Why Have Prices Increased So Much?

This activity is designed for a principles of macroeconomics course. Students will have read the required chapters in a principles of economics textbook. This is a relatively short exercise that can be done in approximately 15-20 minutes by groups of no more than five students. The activity is based on price level changes in the early 2020s.

Overview

This activity asks students to consider an important economic condition. There are several causes of price changes in individual markets. And there are some other sources of upward pressure on price levels, too. There are definitely business and policy implications.

Expected Student Learning Outcomes

Students will be able to evaluate the causes of price level changes

Information Given to Students

In 2022, many prices increased dramatically. Which of the following data would determine if current price increases are demand-side (based on government stimulus payments) or supply-side (based on the war in Ukraine and pandemic-related disruptions)?
A) timing of when prices increased
B) which goods have the highest price level changes
C) what happened in the past when oil prices increased
D) what happened in the past when government spending increased suddenly
E) what happened in other countries that had different stimulus policies

A is often (but not always) an indicator of causation. The caution here is that correlation is not always causation. B will generally be an indicator of causation, but this can be complex. Is there another factor that may have caused the price change? In C and D, it is good to examine history and we can learn much. That said, every situation and time period is different. In E, it is good to consider scenarios from other countries. However, this will not be an "all else equal" situation, and may not be appropriate to apply. Every market is different. This activity can be a good segue into a discussion about the difference between inflation (an increase in the general price level) and price changes due to changes in market conditions. Students could research price changes and use that data to calculate price indices. Also, Federal Reserve monetary policy and/or government fiscal policy could be discussed. Future price level changes (depending on cause) could be customized into this framework. One could also consider the debates economists have regarding this issue.

This exercise precedes a homework or exam with the traditional intro macroeconomic questions. Homework or exam questions could ask students to view specific data sets. It is important to ask students to differentiate between inflation (an increase in the general price level) and price changes due to changes in market conditions. Students could be asked to read an expert view and determine which answer this expert is describing. This is a good test of student research skills.